February performance gains led by equity, commodity hedge funds

Hedge funds posted strong gains in February as equity, commodity and fixed income markets recovered from the prior month’s volatility, despite continued turbulence in emerging markets. The HFRI Fund Weighted Composite Index advanced +2.1% for the month, the best monthly gain in over a year, benefitting from significant and broad-based contributions across a diverse range of strategies, according to data released by HFR, a firm that specialises in indexation, analysis and research of the global hedge fund industry. The HFRI Fund of Funds Index gained +1.8% for the month, also the strongest gain since January 2013.

Industry gains were led by equity hedge (EH) strategies, with the HFRI Equity Hedge Index climbing +2.9% in February, the best monthly performance since the index returned +2.51% in January 2013. Within EH sub-strategies, the volatile HFRI EH: Energy/Basic Materials Index gained +4.4%, its best performance since January 2012. The HFRI EH: Technology/Healthcare Index extended the strong recent performance, up +4.3%; the index led all strategies with a gain of +22.5% in 2013 and leads 2014 with a YTD return of +7%. The HFRI Fundamental Growth Index gained +3.2% for the month, while the HFRI Fundamental Value Index was up +2.6%.

Benefitting from continuing improvement of investor risk tolerance and a strong transactional M&A environment, event driven (ED) funds also posted strong gains in February, led by distressed/restructuring. The HFRI Event Driven Index was up +2.1%, posting its 18th gain in the past 21 months, while the HFRI ED: Distressed Index climbed +3% for the month, the 19th gain in the past 21 months. Activist, merger arbitrage and special situations funds also contributed to ED performance for the period.

Strong performance across commodity, emerging markets, CTA and discretionary macro strategies drove the HFRI Macro Index to a gain of +1.4% for the month, its best performance since July 2012. The HFRI Macro: Commodity Index gained +2.7% for the period, led by contributions across energy and agriculture exposures. The HFRI Emerging Markets Index gained +2.6%, led by regional exposures to the Middle East and recovery in funds focused on Latin America, with the HFRI EM: Latin America Index up +3.2% for the month. The HFRI Macro Discretionary Index gained +1.7%, the strongest gain since January ’13, while the HFRI Systematic Diversified Index advanced +1.6%, the strongest gain since April ’13.

Fixed income (FI) based relative value strategies also posted gains for the month, with the HFRI Relative Value Arbitrage (RVA) Index adding +1.2% for the month, the 53rd gain in the past 62 months. RVA gains were led FI: corporate strategies, with the HFRI FI: Corporate Index gaining +1.4%, though all RVA sub-strategies has positive contributions to Index performance for the month.

“The sharp reversal of investor risk tolerance from the January bottom contributed to strong performance gains in February across a broad range of strategies which categorically exhibit high levels of volatility, including commodities, emerging markets, energy, technology and distressed bonds,” stated Kenneth J Heinz, president of HFR. “In contrast to the powerful equity beta trend which dominated 2013, the EM-centric volatility which has characterised early 2014 has contributed to an opportunity-rich environment for funds which have the fundamental expertise and trading acumen to monetise these shifting volatility paradigms. In this way, hedge funds comprise a sophisticated portfolio mechanism for investors to access these volatile areas and a valuable portfolio complement to traditional exposures for institutional investors.”